DerivSource’s Julia Schieffer speaks to Tara Kruse, ISDA representative for the ISDA Reference Data Working Group about the need for a global identifier and how the group is addressing existing workflow challenges with UTIs.
Q. Can you share some quick background on the ISDA Reference Data Working Group and tell us what the group has been working on thus far with UPIs and UTIs?
The ISDA Reference data working group mostly deals with unique identifiers of various types, including Unique Product Identifiers (UPIs), taxonomies and problems with workflows such as counterparty determinations.
Prior to our current work on Unique Trade Identifiers (UTIs), the working group put out a document on Universal Swap Identifiers (USIs), the identifiers required by the CFTC for Dodd-Frank trade reporting. The document provided guidance around the prescribed construct of the code and established standard best practices for who creates the USI, how it is exchanged and incorporated into trade workflows. The aim of the guidance document was to help parties be on the same page.
We knew from the beginning that there would be a need to expand our efforts to address global UTIs as other regulation came into play. So, once EMIR started to approach, we got together in the working group to create guidance for UTIs with the sole intention of coming up with standard practices that parties could follow to create and exchange the identifiers.
Q. Why are UTIs such a mess?
It is worth pointing out that UTIs are far more complicated compared to Legal Entity Identifiers (LEIs) and this complication contributed to the chaos.
Firstly, with UTIs, compared to USIs and LEIs for instance, there is less prescription from the regulator on how the identifier should look. Secondly, the volume of UTIs needed is huge in comparison to other identifiers such as the LEI, which is an identifier for legal entities and benefits from the use of a utility. For UTIs, every single trade needs to have an identifier, and must exchanged these between parties without the advantage of having this code publicly available. The added complexity of the UTIs creates challenges for firms in the creation and exchange of the identifier, which they need to do in a timely fashion to be regulatory compliant.
Also, the lack of unity among the regulators prior to the introduction of UTIs has created challenges for the market. Different regulators look at the identifier from their view in that they want to make sure that both parties reporting to them are using the same identifier so they can match up the transactions. However, financial institutions don’t have the ability to house different identifiers for each region/regulator and it also becomes confusing when firms have various regulatory specific identifiers with different names.
From our view, UTIs should be a global identifier because we know there is a benefit to there being only one identifier, especially with counterparts reporting globally and in multi-jurisdictional places.
Q. How did you expand the guidance document from USIs only to include UTIs?
We published a new UTI guidance document that leveraged the work we had done for the USI. And in fact, one of the things we had to carry over was the concept that if there is a USI, use that.
There were limitations we had to work within because the CFTC has a specifically required construct for creating a USI that is based on a value that they give you when you register with them. So, there was no way to have one identifier for the trade unless you carry the USI over. And so that’s one key principle in the UTI flow and best practice – if you have a USI use that as the UTI.
Of course, in some cases, we found that it is easier said than done. If you are the party who is reporting to the CFTC and use USIs, then it is easier to re-use that as a UTI. If you’re the non-reporting counterparty to the CFTC, even though you were provided the USI and were expected to retain it for record keeping purposes, not all have done so because it wasn’t necessary prior to the UTI requirement.
In the run up to EMIR reporting there were some issues where trades were ending up with both the USI and UTI or two UTIs because there was not proper exchange or agreement. This was not a good situation but it has since improved as a growing number of market participants are adopting the best practices we suggest in the guidance document.
Q. What is the main challenge firms face in embedding this new identifier?
Financial institutions have to build many different mechanisms to pull and consume those UTIs whether that are from execution or confirmation platforms, for instance. Some firms are struggling with this process of collecting and consuming data, and in some cases, they may find it easier to create their own identifier.
Also, among the providers and platforms, there are also some inconsistencies around who is ready to create and provide UTIs from the various firms and platforms so even the consumers of the UTIs are unsure if they will get the identifier and if they will be able to consume it.
Within the working group, we are addressing those gaps with the assistance of other trade organisations and members. In some cases, it seems backing from the regulators would assist in tackling those inconsistencies from a global perspective to ensure that only one UTI is used.
Q. How is the working group looking to address workflow challenges?
The UTI and USI documents have extensive coverage of workflows and we have an ongoing dialogue in the working groups to discuss possible issues and address them collectively if they are shared concerns. If needed, we will update the document to provide further clarification. And in fact, EMIR came out with their FAQ in February and there were some contradictory directions around UTIs which we discussed and eventually agreed on how that fit into the context of our guidance document.
Generally, we will continue to revise the document as needed to address best practices but there is a certain point where the need to have the global buy-in will trump the guidance document. There is only so far we should go in terms of revising this until we understand what’s going to be promoted from a global perspective, so we continue to address the day-to-day issues with our members and for inclusion in the document if deemed necessary.
Q. Is there clear progress being made in working towards a global identifier?
I think slowly all regulators are getting on board with the need for a global identifier and a recently a feasibility study published from the Financial Stability Board (FSB) on global data aggregation shows more are moving towards a global identifier.
The realisation and support for a global take on identifiers may be coming a little late in the game, however; there are clear benefits to be gained through consistent use of a global identifier. With the backing of regulators, financial institutions will feel more compelled to take a UTI from counterparty, or reuse a USI rather than creating their own.
Q. What is the next step for the working group and for the industry to move towards a global identifier?
The next focus is to get broader agreement around a global solution for a UTI – even if that deviates from what we have put in place because ultimately if we don’t get the regulators behind a global solution it’s not going to work and people aren’t going to feel compelled to use it.
We still stand behind our own standard practice and a lot of people are using them but in the end, if people want to move to a single, global identifier, we want to make sure it is done via a single transition with clear guidance on who will generate the identifier. And this needs to be agreed on a global level first, and with the industry transition to follow.
Ultimately, ISDA is limited in what we can do because we bring out best practices and we try to get the market and regulators behind it, but if they, for whatever reason, are not supportive, this will weaken best practices which is an issue we are experiencing in Europe at the moment.
Q. Moving ahead – what’s next?
Moving ahead there are some simple things we are thinking of but generally we are looking to strengthen the best practices provided by our guidance document. For example, can we show who follows the best practices to remove some of the uncertainty around the process because currently there is confusion as to who is following the guidelines? If a firm knows its counterparties are following the guidelines, it might decide to follow them rather them do something completely different.
Beyond that, I think, as far as the construct of the UTIs is concerned, we have to see whether the regulators go for a global perspective with a different solution or if they are happy with the solution we propose. I think in the medium term the working group will be focused on workflow issues. For example, there are different ways some workflow processes are dealt with in the US compared to Europe, so we are looking at how we can organise that.
Q. Given the industry at large needs to help push this global identifier forward, what would you suggest firms do now?
I would recommend, particularly for discussions in Europe, that the buy side gets more involved to help find solutions. Regulators globally need to hear more about the issues the buy side would experience with changing UTIs and managing having multiple identifiers across jurisdictions.
Q. What is the expected timing for moving to a global UTI?
I would hope that we can make progress on agreeing what a solution would be in 2014. I think it would take longer to get something implemented because there are a lot of parties and infrastructure providers who would be impacted. So, it needs to be a reasonable transition time.
